What would Warren Buffett extract from the banks in exchange for the kind of equity the US is pumping into banks?  Of course, we can't know that for certain, but we do have two recent Buffett transactions to look to for guidance.  Mr. Buffett similarly infused capital into GE and Goldman Sachs recently.  In exchange for those infusions, Mr. Buffett received a 10% preferred return (meaning he gets paid his 10% before common stock shareholders are paid any dividends) and options to purchase additional shares five or ten years from now at what is essentially today's depressed market prices.  What did the US get?  We are still waiting on a lot of details, but it looks like the US is getting a 5% preferred return for the first three years, followed by a 10% return thereafter.  So, on the face of the deal, based on what we know at this point, it would appear that this would not be a transaction Mr. Buffett would accept. 

I do note, however, that a few factors make direct comparisons difficult.  Off the top of my head, I can think of the following important distinctions.  Arguing for higher returns than those extracted by Mr. Buffett are the facts:

--that the US's investments are much larger than those of Mr. Buffett; and

--that the US will not receive re-purchase options.

Arguing for a lower return than that extracted by Mr. Buffett are the facts:

--that, as relatively heavily-regulated companies, the banks should be realtively more sound; and

--that Mr. Buffett's endorsement is worth more than Mr. Paulson's.

I know I am missing some other key distinctions and as I think of those or as others bring them to my attention, I'll add them in a new post or comments.  Those counterveiling considerations would seem to balance each other out or, in my view, call for, on balance, a higher return (the options at today's prices and under today's extraordinary volatility levels would likely be extremely valuable).  But, even if a lower return is called for, I don't think the factors calling for that justify a return that is 50% less than the Buffett deal (for the first few or any years).

Whether the parallel FDIC insurance plan covering future bank borrowings is a good deal remains to be determined.  Virtually no details of that have been provided.  However, the key variable to keep our eyes on will be the insurance premia charged by the FDIC in exchange for that insurance.  That should roughly reflect the spread between the yield on the bank's bonds at the time of the applicable issuance of new debt and the yield on comparable risk-free (that is, US government issued) bonds.  We will have to await more details on that front.